1. Field of the Disclosure
This disclosure relates to systems and methods for analyzing risk associated with lenders offering loans for automobiles.
2. Background of the Disclosure
Most consumers wishing to purchase a new vehicle, such as an automobile, do not have adequate cash to purchase the vehicle. As a result, consumers often need to finance their vehicles by taking out a loan. Some consumers borrow directly from a bank, while other consumers may borrow from the entity selling the vehicle, such as a car dealership. Car dealerships may not only offer loans as a service to their customers, but also as an additional means to generate profit from the sale of vehicles by charging interest on the loan. Some car dealerships, however, may not have adequate cash to provide funding for all of their customers. As a result, some car dealerships borrow money from a bank or financial institution in order to finance loans to customers to buy vehicles. In such scenarios, the bank or financial institution may be considered a direct lender, while the car dealership may be considered an indirect lender.
When vehicles are purchased with financing, the purchased vehicle acts as part of the collateral for the loan. As such, the value of the vehicle is linked to the risk associated with lending money for the purchase of the vehicle. Direct and indirect lenders of funds might mitigate some of this risk by adjusting the interest rate offered on the vehicle loan. For example, the interest rate on a new vehicle may be lower than that of a pre-owned vehicle, or the interest rate on a loan for a luxury brand of car may be lower than the interest rate for a loan on a non-luxury brand of car, because the luxury brand may retain its value better. Indirect lenders may manage this risk on a sale-by-sale basis since they may adjust the interest rates for each sale individually. A direct lender, however can only manage the risk associated with the dealings involving the indirect lender, not the risk associated with the individual sale. Accordingly, direct lenders may evaluate the business practices of the indirect lender in order to assess risk. For example, the direct lender might charge a car dealer only selling new cars less interest than a car dealer only selling pre-owned cars. Alternatively, a direct lender might charge less interest to a car dealer specializing in luxury brands than a car dealer specializing in non-luxury brands.
While most new cars of the same make, model, and sub-model carry approximately the same value, the value of pre-owned cars can vary greatly within the same class. For example, wear, mileage, geography and maintenance history may all affect the value of a pre-owned car in addition to the make, model and sub-model of the vehicle. Furthermore, pre-owned cars may have been subject to events that significantly impact the value of the car in a negative way. In some jurisdictions, these events result in a “brand” being placed on the title of the vehicle. A brand is a permanent designation on the title of the vehicle indicating that an event occurred to the vehicle that may negatively impact the value of the vehicle. For example, if a vehicle received flood damage, it may be branded, or, if a vehicle was involved in an accident and declared a total loss (i.e., the cost to repair the vehicle exceeds the value of the vehicle), the title of the vehicle may receive a brand. Vehicle title branding exists, in part, to notify later purchasers of the vehicle of an event negatively impacting the value of the vehicle because in many cases, repair may make the event less noticeable or undetectable.
Direct lenders often rely upon the indirect lenders to which they lend money to ensure the vehicles they finance are free from title brands, defects or other adverse historical events that would significantly, and negatively, impact the value of the vehicles. While direct lenders may be able to analyze the business practices of the indirect lenders in their portfolio at a macro level, it may be difficult to ensure that the indirect lenders are following the best practices of their industry, or the best practices of their business model. For example, while an indirect lender may represent to a direct lender that they will only finance pre-owned cars free of title brands, the direct lender has no way of verifying that the indirect lender is not providing loans for vehicles with title brands or adverse history events. Thus, direct lenders are limited in their means for assessing the risk of their indirect lenders.